While We Wait for the Flood…

A number of experts have concluded that markets may be in serious trouble in 2013, but stocks could remain surprisingly strong right through the election and winter, writes MoneyShow editor-at-large Howard R. Gold, also ofThe Independent Agenda.

May was a rotten month for stocks, June was one of the best in years, and so far July looks pretty lousy.

And yet, for all the seeming turmoil and volatility, the S&P 500 index is pretty close to its April 2 closing peak of 1,419. Its recent closing low was 1,278 in early May, a pullback of roughly 10% from the high.

And that comes amid deep worries about Europe and slowing economies in China and here in the US. This could mean either the market is poised to make another big move down, or it may be some underlying strength.

Or everyone may be waiting for the Federal Reserve to jump in and untie the heroine just before the train runs her over. Problem is, we just don’t know, especially when stocks are so tied to macroeconomic and political events.

John Authers of the Financial Timeswrote (registration required) that there hasn’t been a time in recent years when movements of stocks have been more correlated, or when stocks’ fundamentals have mattered less.

At times like this, I turn to market history for clues of what might lie ahead. It’s not perfect, but the market’s seasonal and four-year presidential election cycles have held up pretty well over time.

And they’re telling us we’re likely to have a rocky summer, a pre-election rally that could carry over through the winter, and then a big correction or even the end of the cyclical bull market that began in March 2009.

But that’s next year. 2012 still may be pretty good for stocks. Even after the recent shakiness, the S&P 500 is up 6.7% so far this year.

According to the Stock Trader’s Almanac, the Dow Jones Industrial Average posted average gains of 5.8% in presidential election years since 1833. That’s the second best year on average of the four-year presidential cycle.

And as I wrote last November, “during years in which incumbent presidents run for re-election, the market has beaten its average election-year performance significantly.

“It doesn’t matter if the incumbent wins or loses…or how good or bad a president he was.”

The Stock Trader’s Almanac’s editor in chief, Jeffrey Hirsch, told me he expects some turbulence over the summer months, which on average have produced much lower returns.

“The July-October period tends to be weak,” he said. That’s exacerbated during election years when, he explained, “there’s a tendency for the market to drift sideways over the pre-election period.”

In fact, he’s looking for the Dow Jones Industrial Average to fall to 11,500. (It closed above 12,600 Wednesday and peaked at 13,264 in April.) But then Hirsch expects a pre-election rally that may actually telegraph the election’s results.

If the market rallies in September and October, history suggests President Obama will be re-elected, Hirsch said. If stocks wait until November and then take off, it could mean Mitt Romney will win the White House.

In fact, according to the Almanac, “regardless of which party is victorious, the last seven months have seen gains on the S&P in 13 of the 15 presidential election years since 1950.”